RRIF: More Flexible Withdrawal Rules
Article revised on 28 July 2017
If you hold a Registered Retirement Income Fund (RRIF), you must make a minimum withdrawal before December 31 of each year. This amount is taxable and added to your other income. Recently, the Canadian government made changes that reduced the minimum withdrawal amount for RRIF holders aged 71 or over.
The consequences? More flexibility in terms of withdrawal amounts and better capital preservation for a longer period of time.
What’s a RRIF?
For years, you have been contributing to your Registered Retirement Savings Plan (RRSP) and have grown your money without having to pay taxes on the investment income earned. When you reach age 71, you must convert your RRSP into a RRIF.
This fund allows you to grow your savings tax-free and make gradual withdrawals. Since the investments remain registered and the eligible investments are generally the same, you can have the best of both worlds: Funds that are more accessible and retirement savings that continue to grow tax-free.
The best of both worlds? Well, almost. In fact, when you opt for a RRIF, you must make minimum annual withdrawals required by tax legislation and determined based on the accumulated value as at December 31 each year. This amount is taxable and added to your other income. You pay taxes based on the withdrawal amounts, which are withdrawn gradually.
Until very recently, tax legislation required RRIF holders to make withdrawals based on a percentage determined by their age. The government recently made changes to tax legislation reducing the minimum withdrawal amount required by RRIF holders aged between 71 and 80.
The percentage is gradual and increases year to year. Therefore, as of January 1, withdrawals will be determined as follows:
|Age of RRIF holder||New percentage of minimum annual withdrawal||Old percentage of minimum annual withdrawal|
|As of age 95||20||20|
Lower withdrawals, higher interest
How does this change truly affect you? Since the minimum withdrawal amount was reduced, the amount left in your RRIF will grow tax-free. In other words, the funds in your RRIF will last longer.
If necessary, you can still withdraw amounts greater than the minimum required by tax legislation. The RRIF offers an administrative flexibility that other investment vehicles for retirement do not provide yet.
Already withdrawn the minimum amount for 2015?
If you have already withdrawn the minimum amount from your RRIF based on the old calculations, your withdrawal amount is greater than if you had used the new calculations. The “surplus” is not considered an excess amount.
However, since you are entitled to benefit from the new minimum withdrawal amount terms for 2015, you can, to rectify the situation penalty-free, re-contribute to your RRIF any amount you would have withdrawn in excess on the minimum amount calculated based on the new withdrawal amounts. But you must do so before March 1, 2016.
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